Foot Locker's Stock is Down as Price Cuts Hurt Margins and Profits Are Projected to Be Disappointing

Foot Locker Inc. witnessed a significant decline in its shares on Wednesday after the athletic shoe apparel retailer provided a full-year profit outlook that fell short of expectations, coupled with a delay in reaching its target for adjusted margins by two years. Despite better-than-expected fourth-quarter results, the downbeat outlook led to a 23.7% drop in the stock during morning trading, placing it on course for its lowest close since November 28, 2023, and marking the largest one-day decline since a 28.3% plunge on August 23, 2023.

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CEO Mary Dillon acknowledged the significant momentum built during the holiday season through successful "full-price selling" and "compelling promotions." However, she noted that the company proactively reinvested in markdowns to reduce inventory at the end of the year, particularly in areas where inventory levels were challenged, particularly in apparel. This more aggressive pricing strategy resulted in a decline of approximately 3.5 percentage points in the fiscal fourth-quarter gross margin, which settled at 26.8%. The value of merchandise inventories as of February 3 stood at $1.51 billion, reflecting an 8.2% decrease from the previous year.

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While Foot Locker remains optimistic about its "Lace Up" plan to enhance earnings, it acknowledged a two-year delay in achieving its target for earnings before interest and taxes (EBIT) margin of 8.5% to 9%. Chief Financial Officer Mike Baughn explained that due to a lower starting point exiting 2023, the company now anticipates reaching the target by 2028.

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In the quarter ending February 3, Foot Locker reported a net loss of $389 million, or $4.13 per share, a stark contrast to the net income of $19 million, or 20 cents per share, in the same period the previous year. Adjusted earnings per share, excluding nonrecurring items, fell to 38 cents from 97 cents but exceeded the FactSet consensus of 32 cents. Total revenue showed a 2% increase to $2.38 billion, surpassing the FactSet consensus of $2.28 billion.

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Although same-store sales declined by 0.7%, with footwear sales rising in the "low single-digits" percentage range and apparel sales down in the "low double digits," the results exceeded expectations for a 2.3% drop. During the quarter, Foot Locker closed 70 Champ stores and plans to close approximately 40 stores in 2024, including 15 in the first half of the year.

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Looking ahead to fiscal 2024, the company anticipates adjusted earnings per share in the range of $1.50 to $1.70, falling short of the consensus of $1.86. Total sales are expected to decline by 1% to increase by 1%, while the FactSet sales consensus of $8.03 billion implies a 1.7% decrease.

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Over the past three months, Foot Locker's stock has declined by 7.3%, contrasting with the 14.6% rally of the SPDR S&P Retail ETF (XRT) and the 12.2% advancement of the S&P 500 index. The challenges and adjustments faced by Foot Locker underscore the complexities within the retail sector and the evolving consumer landscape, leaving investors and industry observers closely monitoring the company's strategies and performance in the coming months.

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